The recent decision of the Supreme Court in the case of Rainy SKY SA and others (Appellants) v Kookmin Bank (Respondent) [2011] UKSC 50 has reaffirmed the importance of common sense in the interpretation of commercial contracts.
The Facts
Kookmin Bank had issued refund guarantees over the advance payments made by buyers to a shipbuilder. Rainy Sky was a buyer under the contract who claimed under the guarantees provided by Kookmin when the shipbuilder became insolvent. Kookmin argued that, since insolvency was not expressly stated as a circumstance entitling the buyers to claim in the guarantee bond, it was not liable to pay out. There were several other circumstances for pay out detailed in the bond, insolvency not being one of them. However, under the separate contract between the buyer and the shipbuilder, the shipbuilder was required to refund advance payments in the event that it became insolvent.
Initially, the English Court found in favour of Rainy Sky. On appeal, the Court of Appeal overturned the decision by a majority to rule in favour of the bank. The decision of the Court of Appeal has now been unanimously overturned by the Supreme Court.
What does this mean?
The Supreme Court had regard to the importance of commercial common sense when considering what the intentions of the parties were. Where the parties to a contract have used clear and entirely unambiguous language, the Court is duty bound to apply the words in the contract based on their ordinary meanings. However, in the majority of cases, it is possible to apply different interpretations of the language in the contract. In such cases the Court should take a practical approach to the words in the contract and apply an interpretation that makes the most commercial sense in the circumstances.
This is a welcome decision from the Supreme Court that places importance on using common sense when interpreting commercial contracts.
